IRA Rollovers After 60 Days

The IRS can be lenient in certain circumstances.
BY LESLI S. LAFFIE

ince the dawn of individual retirement accounts (IRAs), taxpayers could roll over distributions tax-free into another IRA within 60 days of the date the distribution was received. However, the IRS had consistently argued that it could not extend (waive) the 60-day period, except in statutorily prescribed circumstances. Thus, even when a taxpayer clearly intended to complete a rollover and acted in good faith, and the failure to complete it was entirely beyond his or her control, there was no remedy.

EXCEPTION
A hardship exception enacted in 1991 (IRC section 408(d)(3)(I)) allows the IRS to waive the 60-day rollover period if failing to do so would be against equity or good conscience, as in cases of casualty, disaster or other events beyond a taxpayer’s reasonable control. The IRS is empowered to issue guidance providing objective standards for waivers for periods during which IRA participants had received, but not yet cashed, their checks; financial institution errors; or situations in which taxpayers were unable to complete rollovers due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal errors.

In revenue procedure 2003-16, the IRS explained how taxpayers can apply for a waiver of the 60-day rollover period and when a situation merits an automatic waiver.

In determining whether to grant a waiver, the service considers all relevant facts and circumstances; how taxpayers used the amount distributed (for example, for payments made by check, whether they cashed the check); and the time elapsed after the distribution. Automatic approval is granted (and, thus, no application to the IRS is needed) when a valid rollover would have been completed but for a financial institution error. In any case the distribution must have occurred after 2001.

WAIVER GRANTED
The service recently issued various letter rulings waiving the section 408(d)(3) 60-day rollover requirement and providing taxpayers with a fresh 60-day rollover period beginning on the letter ruling’s date. In each case the taxpayer established that no other amount was distributed from the IRA within the one-year period after the original distribution, as required under section 408(d)(3)(B). The following rulings shed light on the circumstances that prompt an IRS waiver.

Letter rulings 200401020, 200401023 and 200402028 (financial institution mistake).

Letter ruling 200402029 (taxpayer’s physical incapacity prevented compliance with rollover requirements).

Letter rulings 200407025, 200406049 and 200406050 (taxpayer was hard of hearing, mentally disabled or recently widowed and suffering illness).

Letter rulings 200406051 and 200405013 (account administrator error or failure to notify).

Letter ruling 200407023 (bank’s erroneous advice).

Letter ruling 200406054 (inclement weather barred taxpayer from making rollover until after 60-day period).

CONCLUSION
Clearly, the IRS is liberally applying its authority to grant waivers under the hardship exception. CPAs have an opportunity to assist clients whose circumstances qualify.

For more information see the Tax Clinic, edited by Anthony Bakale, in the August 2004 issue of The Tax Adviser.

—Lesli S. Laffie, editor
The Tax Adviser

Notice to readers: Members of the AICPA tax section may subscribe to The Tax Adviser at a reduced price. Contact Judy Smith at 202-434-9270 for a subscription to the magazine or to become a member of the tax section.

SPONSORED REPORT

Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

QUIZ

News quiz: IRS warning on cyberattacks and a change in pension rules

Once again, the IRS sounds the alarm about a threat from cyberthieves. See how much you know about this and other recent news with this short quiz.

CHECKLIST

Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.